Europe must encourage economic growth, says Roubini

By: | 15 Nov 2012

Nouriel Roubini has indirectly entered the debate inflamed on Monday between the International Monetary Fund and European Union over debt reduction targets and timelines, by saying front-loaded austerity in the Eurozone’s debt-ridden states risked “turning a periphery recession into a depression”.

The IMF’s Christine Lagarde and Eurogroup of finance ministers’ Jean-Claude Juncker clashed on Monday over how long Greece should have to reduce debt to GDP ratios, in return for receiving aid.

Speaking at the annual risk management conference of Union Investment in Germany yesterday, Roubini said an extension to the timeline would be valid for Greece and “also be valid” for other peripheral countries that may need central finance, such as Italy or Portugal.

“We could certainly postpone austerity, or do marginal stimulus on a temporary basis,” he said.

“Front-loaded fiscal austerity in the periphery could turn a recession into a depression.”

Roubini said the Eurozone achieving growth soon was crucial, “because you are trying to stabilise debts and deficits as a percentage of GDP and if the denominator is falling you can do whatever you like with the numerator.”

Over the longer term he said it would be strategically important if Europe is to play a significant role in what he said would be the biggest challenge for the globe in years to come – ensuring the empowerment of China on the world political and economic stage is peaceful.

“For the next decade the most important thing from a global point of view will be how to manage the peaceful rise of China. Every time there has been the emergence of a new major power in the world facing an established power, it ended in war. We saw it with Germany, we saw it with Japan.

“In a world of growing power of China…even a country like Germany that is economically strong will be a geopolitical midget. If Europe wants to express itself in the next decade it must be united.”

A more pressing game of power politics, on Capitol Hill over America’s fiscal cliff, would end in compromise, Roubini predicted. Although this would avoid denting US 2013 GDP by an estimated 4%, the effect of the brinkmanship could still shave up to 1.5% from economic expansion, and would rattle markets, he said. He called the US political system in its current manifestation “highly dysfunctional”.